Basel III, with its requirement that banks risk-weight their assets to calculate their capital levels, will bring about sweeping changes in the way banks assess the credits on their books. Banks may need to rely less on the types of stochastic models they’ve used in the past, which plot hundreds of possible scenarios to determine a reasonable probability of default.

While financial institutions have faced difficulties over the years for a multitude of reasons, the major cause of serious banking problems continues to be directly related to lax credit standards for borrowers and counterparties, poor portfolio risk management, or a lack of attention to changes in economic or other circumstances that can lead to a deterioration in the credit standing of a bank’s counterparties. This experience is common in both G-10 and non-G-10 countries.

Throughout every sell-side market risk function I know pretty much every Managing Director (or equivalent) has been complaining about the amount of time they have to spend dealing with regulators. At first it was a period of major adjustment for the more senior executives as they had to work closely with the authorities. There was a view that this would blow over but after a few years it became apparent that they were not going to be solely inward-facing technical specialists anymore. Banks now appreciate that their senior risk specialists are the people regulators want to engage with.

To many people this has been a difficult addition to their remit as some in market risk and analytics are not natural socialisers and are unaccustomed to having outsiders question their methods and processes. As such we have seen a rise in the need to find people who have a more evolved…